These 2020 blockchain tech developments have set the stage for 2021

January will mark 12 years since the Bitcoin genesis block. In that time, blockchain technology has made many significant strides forward. The launch of Ethereum in 2015 introduced smart contracts and token minting. Subsequent years saw developments in areas, such as transaction privacy with the launch of Zcash (ZEC), platforms such as EOS and Tezos attempting to compete with Ethereum on scalability, and dozens of use cases being explored.

In particular, 2018 and 2019 were difficult years. Following Bitcoin’s fall from its all-time high in December 2017, it’s fair to say that the general appetite for blockchain and cryptocurrencies waned significantly during the long crypto winter. However, there was still plenty of innovation happening, which has started to become evident and pay off in 2020.

This year, several key themes have emerged that are poised to shape the blockchain landscape for 2021 and beyond. Here, Cointelegraph tracks 2020’s most significant developments in blockchain.

Platform and infrastructure development

Scalability, interoperability and privacy have been core themes in infrastructure development during 2020. Of course, scalability has already become an age-old topic in blockchain conversations. However, in previous years, the focus was on new platforms claiming to be more scalable than Ethereum. In 2020, the scalability focus shifted to Ethereum itself — in part because the first phase of the Ethereum 2.0 upgrade finally launched at the end of the year, but also because 2020 saw several critical milestones for Ethereum’s second-layer platforms.

With the Eth2 project still at least two years away from full implementation, it seems likely that second-layer platforms are set to thrive well into 2021.

Several platforms have put interoperability at the front of their development efforts this year. Early in 2020, Syscoin and RSK were two of the first platforms to launch a bridge allowing developers to send tokens back and forth to the Ethereum blockchain. Others were quick to follow suit, with Solana, NEAR Protocol, and Ontology also launching their own interoperability solutions using bridge technologies.

In other interoperability news, Polkadot launched its mainnet in May after several years in development. Much like how Eth2 is aiming to be, Polkadot is a sharded network that enables high throughput. However, the project places particular emphasis on its “heterogeneous sharding” mechanism for interoperability.

Whereas Eth2 will only allow its own shards to connect to the central beacon chain, Polkadot’s heterogeneous sharding supports any kind of blockchain, allowing other platforms such as Bitcoin or Ethereum to connect using bridges. Polkadot is already making its mark, sitting comfortably in the top-10 ranked cryptocurrencies and attracting significant interest from the DeFi developer community.

At the infrastructural level, interoperability has been perhaps the most significant focus area across the board in 2020. Therefore, we can surely expect to see more applications taking advantage of this technology in 2021 and beyond.

Blockchain privacy gets a boost

The ability to transact in private via blockchains received a boost this year, with the launch of two privacy-protecting mechanisms. In January, Monero announced Triptych, a new ring signatures construction that offers a greater degree of privacy protection by making it more difficult to detect genuine transactions among decoys. Triptych went live in September.

Elsewhere, Aztec Protocol, a layer-two, privacy-preserving network for Ethereum, launched its mainnet in February. In its first iteration, Aztec was using Zcash technology to enable “confidential tokens” that hide transaction values. However, in October, Aztec launched its 2.0 version, which uses zero-knowledge rollups in private smart contracts that also boost Ethereum’s scalability.

The Electric Coin Company, the operator of Zcash, announced in September that it was working with the Ethereum Foundation to develop the open-source “Halo 2.” It uses a variation of advanced zero-knowledge proofs used by Aztec. The shared research among Ethereum, Aztec and Zcash is proving to accelerate developments in blockchain privacy for the benefit of users across all platforms.

Smoothing the user experience

Poor user experience has long plagued the cryptocurrency and blockchain industry. There were finally some signs in 2020 that showed promise for the benefit of crypto newcomers in retail and institutions.

The most significant development in UX for retail crypto newcomers was undoubtedly the news that PayPal is integrating cryptocurrency. The payments giant opened its crypto buy-and-sell services to U.S. users in November. The next big development will be a merchant integration in early 2021, allowing users to spend their crypto holdings on goods and services, with 26 million merchants on the PayPal network. PayPal says it will handle all the fiat conversions on behalf of the customers, meaning merchants can avoid cryptocurrency’s volatility if they wish.

However, because poor UX has been an ongoing issue for blockchain-based applications and crypto wallets for many years now, the good news is that we’re seeing developments among more decentralized solutions, too. Argent, a new type of wallet that reached significant popularity in 2020, uses smart contracts to enable non-custodial wallets without requiring private keys. In addition to its security features, the wallet also features direct integrations with decentralized finance, including an integration with flagship DeFi yield app Yearn.finance.

Another example is Authereum, a wallet that builds on the first layer of non-custodial wallets such as MetaMask. Authereum offers all the security benefits of a decentralized wallet while providing users with an easy and familiar onboarding experience, using a simple username and password access, backed up by apps such as Google Authenticator. It also eliminates gas payments.

Expect to see further developments in UX in 2021 as developers seek to remove barriers to entry for new users in the face of competition from giants such as PayPal.

DeFi leads the way on application development

DeFi was the undisputed leader of the application pack in 2020, achieving meteoric growth from $675 million to over $15 billion in total value locked.

The growth was fueled by several developments. Early in the year, several platforms, such as Aave and Uniswap, joined dYdX in offering flash loans, enabling limitless uncollateralized lending in DeFi for the first time. A user can borrow funds, stake them in other protocols to earn a profit, and repay the loan, all in a single Ethereum transaction. If they fail to repay, the entire transaction becomes null and void. Despite several high-profile attacks, flash loans have remained extremely popular among arbitrageurs seeking to make a profit from variations in price among decentralized exchanges.

The launch of Uniswap V2 was also a landmark event, with improvements to its oracle functionality, the introduction of flash swaps, and subsequently, an $11-million investment from Andreessen Horowitz. By August, volumes on Uniswap had exceeded those on Coinbase Pro.

While Uniswap’s automated market makers, or AMMs, have been around several years now, 2020 also saw a slew of newer entrants, including Balancer and Curve Finance. Both launched with the aim of iterating on the AMM concept. For instance, Curve offers multi-token stable pools, while Balancer further iterated on the concept by allowing custom token ratios — as opposed to Uniswap’s rigid 50-50 liquidity pools. Others, such as 1inch and Bancor, made strides in dealing with issues like impermanent loss, the phenomenon where liquidity providers make fewer gains than a comparable portfolio.

Composability — DeFi’s secret sauce

The true driver of DeFi’s value in 2020 emerged from the fact that, combined, DeFi decentralized applications are greater than the sum of their individual parts. DeFi applications developed on Ethereum are composable, meaning that users are finding new ways to stack up these “money Legos” to offer new possibilities. Even on the simplest level, users can stake their ETH into Maker to take out a loan in Dai, which can earn them interest by lending on Compound. However, if users have the appetite for riskier strategies, such as margin trading, the possible configurations are endless.

DeFi developer Andre Cronje was one of the first to identify the need to make this feature more accessible, so he created Yearn.finance as the “gateway to DeFi.” Thanks to his efforts, Yearn has proven to be one of the most popular DeFi projects this year due to its features, which make DeFi’s composability both automated and accessible.

Decentralized governance also emerged as a key trend in 2020, after Compound unleashed its COMP token on the market in June. It immediately flew to the top of DeFi rankings.

While governance tokens are seeing a fair bit of speculation, it seems likely that decentralized governance will continue to rise in prominence over the next year. Nonetheless, some technological and economical issues need to be resolved in 2021, including the concentration of wealth, scalability and the proper way to implement governance proposals.

Digital Identity — A foundational challenge

Digital identity has long been identified as a strong potential use case for blockchain to rein in some of the excesses of personal data usage today. It is also becoming an ever more pressing issue for validating blockchain use cases. As member of Congress Bill Foster pointed out in October, cryptographic guarantees are worthless in the real world if the person behind them is a fraud.

Digital identity is already taking center stage as a test use case in the EU-sponsored European Blockchain Services Infrastructure. In Japan, Layer X is working on a blockchain-based voting system underpinned by digital identities.

This year, enterprise-focused Concordium burst onto the market, promising a platform that manages the trade-off between transaction privacy and the need for an identity solution. It uses off-chain identity verification combined with on-chain zero-knowledge proofs and an “anonymity revocation” process. The latter kicks in whenever there’s a legitimate legal order to identify a party to a transaction.

Other digital identity projects are also making significant headway. Oasis Labs announced in December that it was collaborating with BMW on a project focused on the privacy of user data. It allows internal and external parties to query user data without compromising privacy.

Decentralized identity platform Ontology has also focused on the motoring use case. In September, the team at Ontology showcased how its “ONT-ID” could be used to access vehicles and securely record driver data. However, Ontology’s ID also has applications in other areas, including a partnership with Waves on an e-voting solution.

Central Bank Digital Currencies gaining rapid traction post-Libra

With seeds sown in 2019, this year saw the popularity of CBDCs among central bankers worldwide explode perhaps in response to the 2019 events surrounding Facebook’s controversial plans for a proposed stablecoin initially called Libra but that has since been rebranded to Diem.

China has been trailblazing, although it’s still far from a blockchain-based solution. The People’s Bank of China launched a pilot version of the digital yuan in April and, by November, had processed over 4 million transactions totaling close to $300 million.

Despite European Central Bank head Christina Lagarde stating that the European Union won’t be “racing to be first” to issue a digital euro, the bloc seems likely to move ahead with its own CBDC following the outcome of a consultation in January 2021. However, based on an ECB executive’s comments, it could be a very long implementation period. Elsewhere, Sweden, the United Kingdom, Canada and Switzerland have all recently issued powerful indicators that they will move toward their own version of a central bank digital currency over the coming months and years.

Using blockchain tech against COVID-19

The global COVID-19 pandemic has cast a dark shadow over 2020. The emergence of several vaccines toward the end of the year has offered a glimmer of hope that “the new normal” may not be as permanent as it first seemed. However, blockchain technology seems set to play a role in managing the ongoing fight against COVID-19 and any other global pandemic that may arise in the near or distant future.

For instance, the aforementioned digital identity solutions could extend to “health passports” that convey a citizen’s immunity status, allowing a faster transition back to the pre-pandemic society. Privacy campaigners have understandably expressed concerns, but countries such as China and Singapore are already using blockchain technology to help generate verifiable health records.

The World Economic Forum has pointed to the effectiveness of using a blockchain in the global supply chain to distribute COVID-19 vaccines. IBM is also lending a helping hand and has expressed a similar viewpoint.

This year has seen a resurgence in blockchain development, along with the general appetite for cryptocurrencies and the advantages that the technology can bring. Whereas the last big boom of 2017 resulted in a bust phase and the long crypto winter of 2018 and 2019, there’s no reason to believe that this will happen again in 2021. Blockchain technology has progressed significantly since the last bull market, and the upcoming year is poised to continue delivering usable solutions for scalability, privacy and identity that may power the next major cycle of cryptocurrency adoption.